TWTR Stock: New CEO or Not, Twitter Still Is Doomed

Twitter isn't making money, is seeing growth slow and is in big trouble

By Jeff Reeves

Twitter (TWTR) is deep in the throes of a CEO hunt, after former chief exec Dick Costolo departed in July. The rumor mill has been hot and heavy, with big TWTR stock stakeholder and co-founder Jack Dorsey as one of the favorites to run the company.

But whatever happens with the corner office, investors in Twitter stock have bigger problems to think about. Namely, the fact that both revenue and user growth are disappointing … and as a currently unprofitable company, that’s just about the worst trend that TWTR stock holders could see.

Twitter needs to grow and needs to get some real bottom-line impact, but consider me quite skeptical that will happen in the near future.

As such, I think TWTR stock is doomed to continued declines.

The Problem With TWTR Stock

Now I know what the bulls will say — Twitter is a great platform, native to mobile and full of promise. I agree with those statements, and I will admit for the record that I am an active Twitter user myself; hit me up anytime on @JeffReevesIP.

But the big problem with Twitter is that the usefulness of the technology doesn’t equate to success for TWTR stock.

You think Twitter has mobile dominance and scale? Not when compared with Facebook (FB). Consider this observation from InvestorPlace’s Tom Taulli after Twitter earnings:

“On a year-over-year basis, daily active users jumped by 17% to 968 million, while monthly active users were up 13% to 1.49 billion. For perspective, FB added more than 190 million net MAUs, which is more than half of Twitter’s total MAUs (304 million, excluding SMS users).”

This isn’t just a pissing contest, of course. The real reason scale and mobile matter is for “monetization” potential, which normal folks simply call advertising. After all, if you’re a mega-brand looking to deploy millions of dollars on a campaign, would you rather divide it up between multiple outlets or simply find one effective place to spend that cash? And if you’re a smaller company looking for intense targeting, why wouldn’t you run through top-tier digital advertising companies like Facebook or its chief rival Google (GOOG, GOOGL)?

Twitter has a great platform for users, sure. But it doesn’t have the scale or advertising power that marketers are looking for — and that’s what really matters to TWTR stock.

Twitter by the Numbers

Click to Enlarge To be clear, Twitter is trying hard to remedy this. Total revenue was $503 million, an increase of 61% year-over-year from $312 million in 2014. But it’s important to note that jump also came with a surge in the cost of revenue for Twitter — from $100 million to $168 million.

Consider that math — revenue up 61% but expenses up 68%. That’s not a recipe for sustainable growth.

Worse, growth is slowing, with revenue projections up only about 10% quarter-over-quarter if Twitter hits the lower end of its forecast range. That goes hand in hand with the fact that user growth has slowed to a crawl, with TWTR stock adding only a few million users sequentially for a less-than-3% bump in users.

The top line and user metrics need to grow much faster if there is ever going to be significant earnings potential here. And if the social media company has to burn cash like crazy to do so, TWTR may never be significantly profitable.

That, my friends, is the hard reality of Twitter — and why TWTR stock remains down 20% year-to-date and down roughly 50% from 52-week highs around $56 in October.

Any new CEO will have to be quite a dynamic figure to fix this trend.

So keep hoping for that mythic buyout from Google (GOOG, GOOGL) or Alphabet or whoever … because that’s about the only thing that will result in a significant change of sentiment toward Twitter this year.